Liability for breach of contract is often described as a form of strict liability, in which the measure of damages is unaffected by the culpability of the breach. However, courts sometimes do award higher damages, under various legal doctrines, if the breach is characterized by some term such as “willful” or “in bad faith.” The puzzle with which the paper begins is that labels focusing on the breacher’s intentions or mental state are inevitably conclusory or manipulable. Most breaches result from an entire sequence of events, and it will almost always be possible to find some events in that sequence that were deliberate and some that were random or accidental.
The paper then considers two very different economic rationales for increasing the penalties for certain breaches: rationales that differ both in the cases they identify as appropriate for extra penalties, and in the informational demands they place on courts. The first rationale, similarly to a negligence rule in tort law, requires courts to find that the breacher behaved inefficiently before they impose higher penalties – and, moreover, it requires that courts be very accurate in making such findings. However, this rationale is less demanding of courts in another respect, for it does not require that the higher measure of damages be calibrated very precisely. The second rationale, by contrast, does not require courts to make any judgment at all about the efficiency of the breacher’s behavior (much like a strict liability regime in torts), but it does require courts to calibrate the measure of damages more precisely. While this important distinction is familiar from the economic analysis of tort law, it has frequently been overlooked in writings about breach of contract.